On June 13, 2019, the Internal Revenue Service (IRS), Department of Labor and Department of Health and Human Services (HHS) issued a new regulation that is intended to increase the use of tax-favored health reimbursement arrangements (HRAs) as a means of expanding access to health insurance in the individual insurance market. The desired effect of the new regulation, which will take effect on January 1, 2020, is to make it more likely that small employers will be able to offer greater health insurance options to their employees. Announced on June 14, 2019, the Administration expects that as many as estimated 800,000 employers will be able to take advantage of the expanded options made available under the rule.
Under the Affordable Care Act (ACA), employers were not permitted to cover individual health premiums through an HRA, as this was considered a de facto limitation on benefits. The new rules remove the prohibition on integrating a health reimbursement arrangement with individual health insurance under certain conditions. Prior to these rules, the ACA considered an HRA to be a violation of this integration.
Qualified Small Employer HRAs (QSEHRAs) was created under the Cures Act (passed in 2016) and allowed only those employers with 50 or fewer full-time employees and that did not offer a group health plan to offer an HRA to cover individual health insurance premiums. QSEHRAs have not been widely utilized, likely due to the complications and qualifying conditions in order to establish one, as well as the limits on the amounts that can be reimbursed.
Individual Coverage Health Reimbursement Arrangements (ICHRA)
The major change under these new regulations is the creation of the Individual Coverage Health Reimbursement Arrangements (ICHRA). In short, this will allow employers to once again reimburse employees for health coverage on a pre-tax basis without causing an inadvertent ACA violation.
An ICHRA allows employers of all sizes to offer a benefit allowance for employees and there are no limits on contribution amounts, unlike with a QSEHRA that had annual contribution limits. Employers can fund an ICHRA only for employees who are not offered a group health plan.
In offering an ICHRA, employers:
- May either offer an ICHRA or a traditional group health plan but may not offer employees a choice between the two.
- Can create classes of employees around certain employment distinctions (salaried workers vs hourly workers, full-time workers vs part-time workers, workers in certain geographic areas), and then offer an ICHRA to certain classes while providing traditional group coverage for other classes.
- Must offer an ICHRA on the same terms for all those within a designated class; they can increase the ICHRA amount for older workers and for workers with more dependents.
- Can maintain their traditional group health plan for existing enrollees, with new hires offered only an ICHRA.
The ICHRA goal is to increase flexibility. That said, each employer should analyze their complete facts and circumstances and design a plan and classes that are both compliant and meet their needs.
Setting up an ICHRA
- Set an allowance amount per month that an employer will reimburse for health coverage. The allowance amount can be different among different classes but should be the same within classes.
- Employees make purchases of health care expenses – a comprehensive list is available in IRS Publication 502. However, the most common will be individual health insurance.
- Employees submit proof of expenses in a timely manner, such as invoices and receipts.
- Employers reimburse the employees upon review of the documentation and that it meets the standards for reimbursement.
As with other employee benefit plans, a formal plan document is required per IRS and ERISA rules.
It is important to note that employees that participate in an ICHRA as no longer eligible for premium tax credits for insurance purchased on the individual marketplace. Employers should make sure the allowance is not too low as to be considered “unaffordable” under the ACA and not provide minimum value.
Excepted Benefit HRAs
In addition to allowing ICHRAs, the final rule creates a new excepted-benefit HRA that lets employers that offer traditional group health plans provide an additional pretax $1,800 per year (indexed to inflation after 2020) to reimburse employees for certain qualified medical expenses, including premiums for vision and dental insurance, COBRA continuation coverage, and in some circumstances short-term, limited-duration insurance.
To be recognized as an excepted-benefit HRA, the HRA must not be an integral part of a health insurance plan; must provide benefits that are limited in amount; cannot provide reimbursement for certain health insurance premiums, and must be made available under the same terms to all similarly situated individuals.
These new rules will provide employers – especially small employers – an important health insurance coverage option for their employees. Many employers found that prior to the ACA, an HRA was the best way to provide employees with the benefits coverage their employees wanted. After the ACA passed, some employers began to treat these payments as taxable compensation rather than pre-tax benefits in order to comply with the ACA, while others were unaware of this change and continued to utilize an HRA and some others switched to a group health plan. Many employers may want to re-evaluate these changes made in the past in response to the ACA or consider these alternatives.